Self-Regulatory Organizations; Miami International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Exchange Rule 307, Position Limits, and Exchange Rule 309, Exercise Limits, 13323-13329 [2018-06139]
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Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
PREVIOUSLY ANNOUNCED TIME AND DATE OF
THE MEETING: Thursday, March 29, 2018
at 2:00 p.m.
The Closed
Meeting scheduled for Thursday, March
29, 2018 at 2:00 p.m., has been
cancelled.
CONTACT PERSON FOR MORE INFORMATION:
For further information and to ascertain
what, if any, matters have been added,
deleted or postponed, please contact
Brent J. Fields of the Office of the
Secretary at (202) 551–5400.
CHANGES IN THE MEETING:
Dated: March 23, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018–06294 Filed 3–26–18; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82931; File No. SR–MIAX–
2018–10]
Self-Regulatory Organizations; Miami
International Securities Exchange,
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Exchange Rule 307,
Position Limits, and Exchange Rule
309, Exercise Limits
March 22, 2018.
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Pursuant to the provisions of Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on March 8, 2018, Miami International
Securities Exchange, LLC (‘‘MIAX
Options’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) a
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange is filing a proposal to
amend Exchange Rules 307, Position
Limits, Interpretations and Policies .01,
and 309, Exercise Limits, Interpretations
and Policies .01, to increase the position
and exercise limits for options on the
following exchange traded funds
(‘‘ETFs’’): iShares China Large-Cap ETF
(‘‘FXI’’), iShares MSCI Emerging
Markets ETF (‘‘EEM’’), iShares Russell
2000 ETF (‘‘IWM’’), iShares MSCI EAFE
ETF (‘‘EFA’’), iShares MSCI Brazil
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Capped ETF (‘‘EWZ’’), iShares 20+ Year
Treasury Bond Fund ETF (‘‘TLT’’),
PowerShares QQQ Trust (‘‘QQQ’’), and
iShares MSCI Japan ETF (‘‘EWJ’’).
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/ at MIAX Options’ principal
office, and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to amend Exchange Rules 307,
Position Limits, Interpretations and
Policies .01, and 309, Exercise Limits,
Interpretations and Policies .01, to
increase position and exercise limits,
respectively, for options on the
following ETFs: FXI, EEM, IWM, EFA,
EWZ, TLT, QQQ, EWJ.
Market participants’ trading activity
has been adversely impacted by the
current position limits as such limits
have caused options trading in the
symbols subject to this proposal to move
from exchanges to the over-the-counter
market. The Exchange submits this
proposal with the understanding that
market participants’ on-exchange
activity has been hindered by the
existing position limits, causing them to
be unable to provide additional
liquidity not just on the Exchange, but
also on other options exchanges on
which they participate.3 The Exchange
understands that certain market
participants wishing to make trades
involving a large number of options
3 Cboe has received approval from the
Commission for its proposed rule change to
increase its position limits for the following ETFs:
FXI, EEM, IWM, EFA, EWZ, TLT, QQQ, EWJ. See
Securities Exchange Act Release No. 82770
(February 23, 2018) (Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified
by Amendment Nos. 1 and 2) (SR–CBOE–2017–
057).
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13323
contracts in the symbols subject to this
proposal are opting to execute those
trades in the over-the-counter market.
The over-the-counter transactions occur
via bi-lateral agreements, the terms of
which are not publicly disclosed to
other market participants. Therefore,
these large trades do not contribute to
the price discovery process performed
on a lit market.
Position limits are designed to
address potential manipulative schemes
and adverse market impact surrounding
the use of options, such as disrupting
the market in the security underlying
the options. The potential manipulative
schemes and adverse market impact are
balanced against the potential of setting
the limits so low as to discourage
participation in the options market. The
level of those position limits must be
balanced between curtailing potential
manipulation and the cost of preventing
potential hedging activity that could be
used for legitimate economic purposes.
Position limits for options on ETFs,
such as those subject to this proposal
are determined pursuant to Exchange
Rule 307, and vary according to the
number of outstanding shares and the
trading volume of the underlying stocks
or ETFs over the past six-months. The
Exchange notes that the ETFs that
underlie options subject to this proposal
are highly liquid, and are based on a
broad set of highly liquid securities and
other reference assets. Likewise, the
Commission has recognized the
liquidity of the securities comprising
the underlying interest of the SPDR S&P
500 ETF (‘‘SPY’’) in permitting no
position limits on SPY options since
2012,4 and expanded position limits for
options on EEM, IWM and QQQ.
The largest in capitalization and the
most frequently traded stocks and ETFs
have an option position limit of 250,000
contracts (with adjustments for splits,
re-capitalizations, etc.) on the same side
of the market; and smaller capitalization
stocks and ETFs have position limits of
200,000, 75,000, 50,000 or 25,000
contracts (with adjustments for splits,
re-capitalizations, etc.) on the same side
of the market. Options on FXI, EFA,
EWZ, TLT, and EWJ are currently
subject to the standard position limit of
250,000 contracts, as set forth in
Exchange Rule 307. Interpretation and
Policy .01 of Exchange Rule 307 sets
forth separate position limits for options
on specific ETFs as follows:
• Options on EEM are 500,000
contracts;
4 See Securities Exchange Act Release Nos. 67672
(August 15, 2012), 77 FR 50750 (August 22, 2012)
(SR–NYSEAmex–2012–29); 67937 (September 27,
2012), 77 FR 60489 (October 3, 2012) (SR–CBOE–
2012–091).
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Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
• Options on IWM are 500,000
contracts; and
• Options on QQQ are 900,000
contracts.
Interpretation and Policy .01 of
Exchange Rule 307 also sets forth
separate position limits for options on
SPY (no limit) and options on DIA
(300,000 contracts). However, the
Exchange is not proposing to modify the
position limits for options on SPY or
DIA.
The purpose of this proposal is to
amend Rules 307, Position Limits,
Interpretations and Policies .01, and
309, Exercise Limits, Interpretations and
Policies .01 to double the position and
exercise limits for FXI, EEM, IWM, EFA,
EWZ, TLT, QQQ, and EWJ. As such,
options on FXI, EFA, EWZ, TLT, and
EWJ would no longer be subject to the
standard position and exercise limits as
set forth under Exchange Rules 307 and
309. Accordingly, Interpretations and
Policies .01 to Exchange Rule 307 and
Interpretations and Policies .01 to
Exchange Rule 309 would be amended
to set forth that the position and
exercise limits for options on FXI, EFA,
EWZ, TLT, and EWJ would be 500,000
contracts. These position and exercise
limits equal the current position and
exercise limits for options on IWM and
EEM and are similar to the current
position and exercise limits for options
on QQQ, as set forth in Interpretations
and Policies .01 to Exchange Rule 307
and Interpretations and Policies .01 to
Exchange Rule 309.
Interpretations and Policies .01 to
Exchange Rule 307 and Interpretations
and Policies .01 to Exchange Rule 309
would be further amended to increase
the position and exercise limits for the
remaining options subject to this
proposal as follows:
• The position and exercise limits for
options on EEM would be increased
from 500,000 contracts to 1,000,000
contracts;
• The position and exercise limits for
options on IWM would be increased
from 500,000 contracts to 1,000,000
contracts; and
• The position and exercise limits for
options on QQQ would be increased
from 900,000 contracts to 1,800,000
contracts.
The Exchange’s proposal mirrors that
of the Cboe Exchange, Inc. (‘‘Cboe’’),
which seeks to increase the position and
exercise limits for FXI, EEM, IWM, EFA,
EWZ, TLT, QQQ, and EWJ which was
filed by Cboe on August, 15, 2017.5
In support of this proposal, the
Exchange represents that the abovelisted ETFs qualify for either: (i) The
initial listing criteria set forth in
Exchange Rule 402(i)(E)(2) for ETFs
holding non-U.S. component securities;
or (ii) for ETFs listed pursuant to
generic listing standards for series of
portfolio depository receipts and index
fund shares based on international or
global indexes under which a
comprehensive surveillance agreement
(‘‘CSA’’) is not required.6
FXI tracks the performance of the
FTSE China 50 Index, which is
composed of the 50 largest Chinese
stocks.7 EEM tracks the performance of
the MSCI Emerging Markets Index,
which is composed of approximately
800 component securities.8 The MSCI
Emerging Markets Index consists of the
following 21 emerging market country
indices: Brazil, Chile, China, Colombia,
Czech Republic, Egypt, Hungary, India,
Indonesia, Korea, Malaysia, Mexico,
Morocco, Peru, Philippines, Poland,
Russia, South Africa, Taiwan, Thailand,
and Turkey.9 IWM tracks the
performance of the Russell 2000 Index,
2017
ADV
ETF
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FXI ...................................................................................................................
EEM .................................................................................................................
IWM ..................................................................................................................
EFA ..................................................................................................................
EWZ .................................................................................................................
TLT ...................................................................................................................
5 See Securities Exchange Act Release No. 81483
(August 25, 2017), 82 FR 41457 (August 31, 2017)
(SR–CBOE–2017–057 Notice of Filing of a Proposed
Rule Change To Amend Interpretation and Policy
.07 of Exchange Rule 4.11, Position Limits, To
Increase the Position Limits for Options on Certain
ETFs). See also SR–CBOE–2017–057, Partial
Amendment No. 1 (November 22, 2017).
6 The Exchange notes that the initial listing
criteria for options on ETFs that hold non-U.S.
component securities are more stringent than the
maintenance listing criteria for those same ETF
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15.08
52.12
27.46
19.42
17.08
8.53
options. See Exchange Rule 402(i)(E)(2); Exchange
Rule 403(g).
7 See https://www.ishares.com/us/products/
239536/ishares-china-largecap-etf.
8 See https://us.ishares.com/productinfo/fund/
overview/EEM.htm.
9 See https://www.msci.com/products/indices/
tools/#EM.
10 See https://www.ishares.com/us/products/
239710/ishares-russell-2000-etf.
11 See https://www.ishares.com/us/products/
239623/.
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which is composed of 2,000 small-cap
domestic stocks.10 EFA tracks the
performance of MSCI EAFE Index,
which has over 900 component
securities.11 The MSCI EAFE Index is
designed to represent the performance
of large and mid-cap securities across 21
developed markets, including countries
in Europe, Australasia and the Far East,
excluding the U.S. and Canada.12 EWZ
tracks the performance of the MSCI
Brazil 25/50 Index, which is composed
of shares of large and mid-size
companies in Brazil.13 TLT tracks the
performance of ICE U.S. Treasury 20+
Year Bond Index, which is composed of
long-term U.S. Treasury bonds.14 QQQ
tracks the performance of the Nasdaq100 Index, which is composed of 100 of
the largest domestic and international
nonfinancial companies listed on the
Nasdaq Stock Market LLC (‘‘Nasdaq’’).15
EWJ tracks the MSCI Japan Index, which
tracks the performance of large and midsized companies in Japan.16
MIAX Options represents that more
than 50% of the weight of the securities
held by the options subject to this
proposal are also subject to a CSA.17
Additionally, the component securities
of the MSCI Emerging Markets Index on
which EEM is based for which the
primary market is in any one country
that is not subject to a CSA do not
represent 20% or more of the weight of
the MSCI Emerging Markets Index.18
Finally, the component securities of the
MSCI Emerging Markets Index on which
EEM is based, for which the primary
market is in any two countries that are
not subject to CSAs do not represent
33% of more of the weight of the MSCI
Emerging Markets Index.19
In support of this proposal, the
following trading statistics have been
compiled.
Shares
outstanding
(million)
2017
ADV
71,944
287,357
490,070
98,844
95,152
80,476
12 See
78.6
797.4
253.1
1,178.4
159.4
60.0
Fund
market cap
($million)
3,343.6
34,926.1
35,809.1
78,870.3
6,023.4
7,442.4
https://www.msci.com/eafe.
https://www.ishares.com/us/products/
239612/ishares-msci-brazil-capped-etf.
14 See https://www.ishares.com/us/products/
239454/.
15 See https://indexes.nasdaqomx.com/Index/
Overview/NDX .
16 See https://www.ishares.com/us/products/
239665/EWJ.
17 See Exchange Rule 402(i)(E)(2)(ii).
18 See Exchange Rule 402(i)(E)(2)(ii)(B).
19 See Exchange Rule 402(i)(E)(2)(ii)(C).
13 See
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2017
ADV
ETF
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QQQ .................................................................................................................
EWJ .................................................................................................................
The Exchange believes that the
liquidity in the underlying ETFs, and
the liquidity in the ETF options support
its request to increase the position limits
for the options subject to this proposal.
As to the underlying ETF shares,
through July 31, 2017, the year-to-date
average daily trading volume was:
(i) FXI across all exchanges was 15.08
million shares; (ii) EEM across all
exchanges was 52.12 million shares;
(iii) IWM across all exchanges was 27.46
million shares; (iv) EFA across all
exchanges was 19.42 million shares;
(v) EWZ across all exchanges was 17.08
million shares; (vi) TLT across all
exchanges was 8.53 million shares;
(vii) QQQ across all exchanges was
26.25 million shares; and (vii) EWJ
across all exchanges was 6.06 million
shares.
In proposing the increased position
limits, the Exchange considered the
availability of economically equivalent
products and their respective position
limits. For instance, some of the ETFs
underlying options subject to this
proposal are based on broad-based
indices that underlie cash settled
options that are economically
equivalent to the ETF options that are
the subject of this proposal and have no
position limits. Other ETFs are based on
broad-based indexes that underlie cashsettled options with position limits
reflecting notional values that are larger
than the current position limits for ETF
analogues (EEM, EFA). Where there was
no approved index analogue, the
Exchange believes, based on the
liquidity, breadth and depth of the
underlying market, that the index
referenced by the ETF would be
considered a broad-based index.20 The
Exchange argues that if certain position
limits are appropriate for the options
overlying the same index or is an
analogue to the basket of securities that
the ETF tracks, then those same
economically equivalent position limits
should be appropriate for the option
overlying the ETF. In addition, the
market capitalization of the underlying
index or reference is large enough to
absorb any price movements that may
be caused by an oversized trade. Also,
the Authorized Participant or issuer
may look to the stocks comprising the
20 Exchange
Rule 1804 sets forth the position
limits for broad-based index options.
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26.25
6.06
analogous underlying index or reference
asset when seeking to create additional
ETF shares which are part of the
creation/redemption process to address
supply and demand or to mitigate the
price movement of the price of the ETF.
For example, the PowerShares QQQ
Trust or QQQ is an ETF that tracks the
Nasdaq 100 Index or NDX, which is an
index composed of 100 of the largest
non-financial securities listed on the
Nasdaq Stock Market LLC (‘‘Nasdaq’’).
Options on NDX are currently subject to
no position limits but share similar
trading characteristics as QQQ.21 Based
on QQQ’s share price of $154.54 22 and
NDX’s index level of 6,339.14,
approximately 40 contracts of QQQ
equals one contract of NDX. Assume
that NDX was subject to the standard
position limit of 25,000 contracts for
broad-based index options under
Exchange Rule 1804(a). Based on the
above comparison of notional values,
this would result in a position limit
equivalent to 1,000,000 contracts for
QQQ as NDX’s analogue. However, NDX
is not subject to position limits and has
an average daily trading volume of
15,300 contracts. QQQ is currently
subject to a position limit of 900,000
contracts but has a much higher average
daily trading volume of 579,404
contracts. Furthermore, NDX currently
has a market capitalization of $17.2
trillion and QQQ has a market
capitalization of $50,359.7 million, and
the component securities of NDX, in
aggregate, have traded an average of 440
million shares per day in 2017, both
large enough to absorb any price
movement caused by a large trade in the
QQQ. The Commission has also
approved no position limit for NDX,
although it has a much lower daily
trading volume than its analogue, the
QQQ. Therefore, the Exchange believes
it is reasonable to increase the position
limit for options on the QQQ from
900,000 to 1,800,000 contracts.
The iShare [sic] Russell 2000 ETF or
IWM, is an ETF that also tracks the
Russell 2000 index or RUT, which is an
index composed of 2,000 small-cap
domestic companies in the Russell 3000
index. Options on RUT are currently
21 Id.
22 All share prices used herein are based on the
closing price of the security on November 16, 2017.
Source: Yahoo Finance.
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Shares
outstanding
(million)
2017
ADV
579,404
4,715
351.6
303.6
Fund
market cap
($million)
50,359.7
16,625.1
subject to no position limits but share
similar trading characteristics as IWM.23
Based on IWM’s share price of $144.77
and RUT’s index level of 1,486.88,
approximately 10 contracts of IWM
equals one contract of RUT. Assume
that RUT was subject to the standard
position limit of 25,000 contracts for
broad-based index options under
Exchange Rule 1804(a). Based on the
above comparison of notional values,
this would result in a position limit
equivalent to 250,000 contracts for IWM
as RUT’s analogue. However, RUT is not
subject to position limits and has an
average daily trading volume of 66,200
contracts. IWM is currently subject to a
position limit of 500,000 contracts but
has a much higher average daily trading
volume of 490,070 contracts. The
Commission has approved no position
limit for RUT, although it has a much
lower average daily trading volume than
its analogue, the IWM. Furthermore,
RUT currently has a market
capitalization of $2.4 trillion and IWM
has a market capitalization of $35,809.1
million, and the component securities of
RUT, in aggregate, have traded an
average of 270 million shares per day in
2017, both large enough to absorb any
price movement caused by a large trade
in the IWM. Therefore, the Exchange
believes it is reasonable to increase the
position limit for options on the IWM
from 500,000 to 1,000,000 contracts.
EEM tracks the performance of the
MSCI Emerging Markets Index or MXEF,
which is composed of approximately
800 component securities following 21
emerging market country indices: Brazil,
Chile, China, Colombia, Czech Republic,
Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru,
Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey.
Below makes the same notional value
comparisons as made above. Based on
EEM’s share price of $47.06 and MXEF’s
index level of 1,136.45, approximately
24 contracts of EEM equals one contract
of MXEF. Assume that MXEF was
subject to the standard position limit of
25,000 contracts for broad-based index
options under Exchange Rule 1804(a).
Based on the above comparison of
notional values, this would result in a
position limit economically equivalent
to 604,000 contracts for EEM as MXEF’s
23 See
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analogue. However, MXEF has an
average daily trading volume of 180
contracts. EEM is currently subject to a
position limit of 500,000 contracts but
has a much higher average daily trading
volume of 287,357 contracts.
Furthermore, MXEF currently has a
market capitalization of $5.18 trillion
and EEM has a market capitalization of
$34,926.1 million, and the component
securities of MXEF, in aggregate, have
traded an average of 33.6 billion shares
per day in 2017, both large enough to
absorb any price movement caused by a
large trade in the EEM. Therefore, based
on the comparison of average daily
trading volume, the Exchange believes it
is reasonable to increase the position
limit for options on the EEM from
500,000 to 1,000,000 contracts.
EFA tracks the performance of the
MSCI EAFE Index or MXEA, which has
over 900 component securities designed
to represent the performance of large
and mid-cap securities across 21
developed markets, including countries
in Europe, Australia and the Far East,
excluding the U.S. and Canada. Below
makes the same notional value
comparison as made above. Based on
EFA’s share price of $69.16 and MXEA’s
index level of 1,986.15, approximately
29 contracts of EFA equals one contract
of MXEA. Assume MXEA was subject to
the standard position limit of 25,000
contracts for broad-based index options
under Exchange Rule 1804(a). Based on
the above comparison of notional
values, this would result in a position
limit economically equivalent to
721,000 contracts for EFA as MXEA’s
analogue. Furthermore, MXEA currently
has a market capitalization of $18.7
trillion and EFA has a market
capitalization of $78,870.3 million, and
the component securities of MXEA, in
aggregate, have traded an average of 4.6
billion shares per day in 2017, both
large enough to absorb any price
movement cause by a large trade in
EFA. However, MXEA has an average
daily trading volume of 270 contracts.
EFA is currently subject to a position
limit of 250,000 contracts but has a
much higher average daily trading
volume of 98,844 contracts. Based on
the above comparisons, the Exchange
believes it is reasonable to increase the
position limit for options on the EFA
from 250,000 to 500,000 contracts.
FXI tracks the performance of the
FTSE China 50 Index, which is
composed of the 50 largest Chinese
stocks. There is currently no index
analogue for FXI approved for options
trading. However, the FTSE China 50
Index currently has a market
capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18
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20:30 Mar 27, 2018
Jkt 244001
million, both large enough to absorb any
price movement caused by a large trade
in FXI. The components of the FTSE
China 50 Index, in aggregate, have an
average daily trading volume of 2.3
billion shares. FXI is currently subject to
a position limit of 250,000 contracts but
has a much higher average daily trading
volume of 15.08 million shares. Based
on the above comparisons, the Exchange
believes it is reasonable to increase the
position limit for options on the FXI
from 250,000 to 500,000 contracts.
EWZ tracks the performance of the
MSCI Brazil 25/50 Index, which is
composed of shares of large and midsize companies in Brazil. There is
currently no index analogue for EWZ
approved for options trading. However,
the MSCI Brazil 25/50 Index currently
has a market capitalization of $700
billion and EWZ has a market
capitalization of $6,023.4 million, both
large enough to absorb any price
movement caused by a large trade in
EWZ. The components of the MSCI
Brazil 25/50 Index, in aggregate, have an
average daily trading volume of 285
million shares. EWZ is currently subject
to a position limit of 250,000 contracts
but has a much higher average daily
trading volume of 17.08 million shares.
Based on the above comparisons, the
Exchange believes it is reasonable to
increase the position limit for options
on the EWZ from 250,000 to 500,000
contracts.
TLT tracks the performance of ICE
U.S. Treasury 20+ Year Bond Index,
which is composed of long-term U.S.
Treasury bonds. There is currently no
index analogue for TLT approved for
options trading. However, the U.S.
Treasury market is one of the largest and
most liquid markets in the world, with
over $14 trillion outstanding and
turnover of approximately $500 billion
per day. TLT currently has a market
capitalization of $7,442.4 million, both
large enough to absorb any price
movement caused by a large trade in
TLT. Therefore, the potential for
manipulation will not increase solely
due to the increase in position limits as
set forth in this proposal. Based on the
above comparisons, the Exchange
believes it is reasonable to increase the
position limit for options on TLT from
250,000 to 500,000 contracts.
EWJ tracks the MSCI Japan Index,
which tracks the performance of large
and mid-sized companies in Japan.
There is currently no index analogue for
EWJ approved for options trading.
However, the MSCI Japan Index has a
market capitalization of $3.5 trillion and
EWJ has a market capitalization of
$16,625.1 million, and the component
securities of the MSCI Japan Index, in
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aggregate, have traded an average of 1.1
billion shares per day in 2017, both
large enough to absorb any price
movement caused by a large trade in
EWJ. EWJ is currently subject to a
position limit of 250,000 contracts and
has an average daily trading volume of
6.6 million shares. Based on the above
comparisons, the Exchange believes it is
reasonable to increase the position limit
for options on EWJ from 250,000 to
500,000.
The Exchange believes that increasing
the position limits for the options
subject to this proposal would lead to a
more liquid and competitive market
environment for these options, which
will benefit customers interested in
these products. Under the proposal, the
reporting requirement for the above
options would be unchanged. Thus, the
Exchange would still require that each
Member that maintains a position in the
options on the same side of the market,
for its own account or for the account
of a customer, to report certain
information to the Exchange. This
information would include, but would
not be limited to, the options’ position,
whether such position is hedged and, if
so, a description of the hedge, and the
collateral used to carry the position, if
applicable. Exchange Market Makers 24
(including Primary Lead MarketMakers) 25 would continue to be exempt
from this reporting requirement, as
Market Maker information can be
accessed through the Exchange’s market
surveillance systems. In addition, the
general reporting requirement for
customer accounts that maintain an
aggregate position of 200 or more
options contracts would remain at this
level for the options subject to this
proposal.26
The Exchange believes that the
existing surveillance procedures and
reporting requirements at the Exchange,
other options exchanges, and at the
several clearing firms are capable of
properly identifying unusual and/or
illegal trading activity. In addition,
routine oversight inspections of the
Exchange’s regulatory programs by the
Commission have not uncovered any
material inconsistencies or
shortcomings in the manner in which
the Exchange’s market surveillance is
conducted. These procedures utilize
24 The term ‘‘Market Makers’’ refers to ‘‘Lead
Market Makers’’, ‘‘Primary Lead Market Makers’’
and ‘‘Registered Market Makers’’ collectively. See
Exchange Rule 100.
25 The term ‘‘Primary Lead Market Maker’’ means
a Lead Market Maker appointed by the Exchange to
act as the Primary Lead Market Maker for the
purposes of making markets in securities traded on
the Exchange. See Exchange Rule 100.
26 See Exchange Rule 310 for reporting
requirements.
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daily monitoring of market movements
via automated surveillance techniques
to identify unusual activity in both
options and underlying stocks.27
Furthermore, large stock holdings must
be disclosed to the Commission by way
of Schedules 13D or 13G.28 The
positions for options subject to this
proposal are part of any reportable
positions and, thus, cannot be legally
hidden. Moreover, the Exchange’s
requirement that Members file reports
with the Exchange for any customer
who held aggregate large long or short
positions of any single class for the
previous day will continue to serve as
an important part of the Exchange’s
surveillance efforts.
The Exchange believes that the
current financial requirements imposed
by the Exchange and by the Commission
adequately address concerns that a
Member or its customer may try to
maintain an inordinately large unhedged position in the options subject
to this proposal. Current margin and
risk-based haircut methodologies serve
to limit the size of positions maintained
by any one account by increasing the
margin and/or capital that a Member
must maintain for a large position held
by itself or by its customer.29 In
addition, Rule 15c3–1 30 imposes a
capital charge on Members to the extent
of any margin deficiency resulting from
the higher margin requirement.
daltland on DSKBBV9HB2PROD with NOTICES
2. Statutory Basis
The Exchange believes that its
proposal is consistent with the
requirements of the Act and the rules
and regulations thereunder that are
applicable to a national securities
exchange, and, in particular, with the
requirements of Section 6(b) of the
Act.31 Specifically, the proposal is
consistent with Section 6(b)(5) of the
Act 32 because it is designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in facilitating transactions in securities,
to remove impediments to, and perfect
the mechanism of, a free and open
market and a national market system
and, in general, to protect investors and
the public interest. The current position
limits for the options subject to this
proposal have inhibited the ability of
27 These procedures have been effective for the
surveillance of trading the options subject to this
proposal and will continue to be employed.
28 17 CFR 240.13d–1.
29 See Exchange Rule 1502 for a description of
margin requirements.
30 17 CFR 240.15c3–1.
31 15 U.S.C. 78f(b).
32 15 U.S.C. 78f(b)(5).
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Market Makers to make markets on the
Exchange. Specifically, the proposal is
designed to encourage Market Makers to
shift liquidity from over the counter
markets onto the Exchange, which will
enhance the process of price discovery
conducted on the Exchange through
increased order flow. The proposal will
also benefit institutional investors as
well as retail traders, and public
customers, by providing them with a
more effective trading and hedging
vehicle. In addition, the Exchange
believes that the structure of the options
subject to this proposal and the
considerable liquidity of the market for
those options diminishes the
opportunity to manipulate this product
and disrupt the underlying market that
a lower position limit may protect
against.
Increased position limits for select
actively traded options, such as that
proposed herein, is not novel and has
been previously approved by the
Commission. For example, the
Commission has previously approved,
on a pilot basis, eliminating position
limits for options on the SPDR S&P 500
ETF (‘‘SPY’’).33 Additionally, the
Commission has approved similar
proposed rule changes by other
exchanges to increase position and
exercise limits for options on highly
liquid, actively-traded ETFs,34
including a proposal to permanently
eliminate the position and exercise
limits for options overlaying the S&P
500 Index, S&P 100 Index, Dow Jones
Industrial Average, and Nasdaq 100
Index.35 In approving the permanent
elimination of position and exercise
limits, the Commission relied heavily
upon the exchange’s surveillance
capabilities, the Commission expressed
trust in the enhanced surveillance and
33 See Securities Exchange Act Release Nos.
67672 (August 15, 2012), 77 FR 50750 (August 22,
2012) (SR–NYSEAmex–2012–29); 67937
(September 27, 2012), 77 FR 60489 (October 3,
2012) (SR–CBOE–2012–091).
34 See Securities Exchange Act Release Nos .
68086 (October 23, 2012), 77 FR 65600 (October 29,
2012) (SR–CBOE–2012–066); Securities Exchange
Act Release No. 68478 (December 19, 2012), 77 FR
76132 (December 26, 2012) (SR–BOX–2012–023);
Securities Exchange Act Release No. 68398
(December 11, 2012), 77 FR 74700 (December 17,
2012) (SR–ISE–2012–093); Securities Exchange Act
Release No. 68293 (November 27, 2012), 77 FR
71644 (December 3, 2012) (SR–Phlx–2012–132);
Securities Exchange Act Release No. 68358
(December 5, 2012), 77 FR 73708 (December 11,
2012) (SR–NYSE MKT–2012–071); Securities
Exchange Act Release No. 68359 (December 5,
2012), 77 FR 73716 (December 11, 2012) (SR–NYSE
Arca–2012–132); and .69457 (April 25, 2012), 78 FR
25502 (May 1, 2013) (SR–MIAX–2013–17).
35 See Securities Exchange Act Release Nos.
44994 (October 26, 2001), 66 FR 55722 (November
2, 2001) (SR–CBOE–2001–22); 52650 (October 21,
2005), 70 FR 62147 (October 28, 2005) (SR–CBOE–
2005–41) (‘‘NDX Approval’’).
PO 00000
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13327
reporting safeguards that the exchange
took in order to detect and deter
possible manipulative behavior which
might arise from eliminating position
and exercise limits.36 Furthermore, as
described more fully above, options on
other ETFs have the position limits
proposed herein, but their trading
volumes are significantly lower than the
ETFs subject to the proposed rule
change.
Furthermore, the proposed position
limits set forth in this proposal would
continue to address potential
manipulative activity while allowing for
potential hedging activity for
appropriate economic purposes. The
creation and redemption process for
these ETFs also lessens the potential for
manipulative activity. When an ETF
company wants to create more ETF
shares, it looks to an Authorized
Participant, which is a market maker or
other large financial institution, to
acquire the securities the ETF is to hold.
For instance, IWM is designed to track
the performance of the Russell 2000
Index, the Authorized Participant will
purchase all the Russell 2000
constituent securities in the exact same
weight as the index, then deliver those
shares to the ETF provider. In exchange,
the ETF provider gives the Authorized
Participant a block of equally valued
ETF shares, on a one-for-one fair value
basis. The price is based on the net asset
value, not the market value at which the
ETF is trading. The creation of new ETF
units can be conducted all trading day
and is not subject to position limits.
This process can also work in reverse
where the ETF company seeks to
decrease the number of shares that are
available to trade. The creation and
redemption process, therefore, creates a
direct link to the underlying
components of the ETF, and serves to
mitigate potential price impact of the
ETF shares that might otherwise result
from increased position limits.
The ETF creation and redemption
seeks to keep ETF share prices trading
in line with the ETF’s underlying net
asset value. Because an ETF trades like
a stock, its price will fluctuate during
the trading day, due to simple supply
and demand. If demand to buy an ETF
is high, for instance, the ETF’s share
price might rise above the value of its
underlying securities. When this
happens, the Authorized Participant
believes the ETF may now be
overpriced, and can buy the underlying
shares that compose the ETF and then
sell the ETF shares on the open market.
This should help drive the ETF’s share
price back toward fair value. Likewise,
36 See
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28MRN1
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Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
if the ETF starts trading at a discount to
the securities it holds, the Authorized
Participant can buy shares of the ETF
and redeem them for the underlying
securities. Buying undervalued ETF
shares should drive the price of the ETF
back toward fair value. This arbitrage
process helps to keep an ETF’s price in
line with the value of its underlying
portfolio.
Lastly, the Commission expressed the
belief that removing position and
exercise limits may bring additional
depth and liquidity without increasing
concerns regarding intermarket
manipulation or disruption of the
options or the underlying securities.37
The Exchange’s existing surveillance
and reporting safeguards are designed to
deter and detect possible manipulative
behavior which might arise from
eliminating position and exercise limits.
daltland on DSKBBV9HB2PROD with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
MIAX Options does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange believes the entire proposal is
consistent with Section (6)(b)(8) of the
Act 38 in that it does not impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. On the
contrary, the Exchange believes the
proposal promotes competition because
it will enable the listed option
exchanges to attract additional order
flow from the over-the-counter market,
who in turn compete for those orders.39
The Exchange believes that the
proposed rule change will result in
additional opportunities to achieve the
investment and trading objectives of
market participants seeking efficient
trading and hedging vehicles, to the
benefit of investors, market participants,
and the marketplace in general.
In this regard and as indicated above,
the Exchange notes that the rule change
is being proposed as a competitive
response to changes put in place at
Cboe. MIAX Options believes this
proposed rule change is necessary to
permit fair competition among the
options exchanges and to establish
uniform position limits for additional
multiply listed option classes.
37 Id.
38 15
U.S.C. 78f(b)(8).
example, Nasdaq position limits are
determined by the position limits established by the
Exchange. See Nasdaq Rule Sec. 7 (Position Limits).
39 For
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change
does not (i) significantly affect the
protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) of the Act 40 and Rule 19b–
4(f)(6) thereunder.41
A proposed rule change filed
pursuant to Rule 19b–4(f)(6) under the
Act 42 normally does not become
operative for 30 days after the date of its
filing. However, Rule 19b–4(f)(6)(iii) 43
permits the Commission to designate a
shorter time if such action is consistent
with the protection of investors and the
public interest. The Exchange has asked
the Commission to waive the 30-day
operative delay so that the proposed
rule change may become operative upon
filing. The Exchange states that waiver
of the operative delay would be
consistent with the protection of
investors and the public interest
because it would allow the Exchange to
immediately increase its position and
exercise limits for the products subject
to this proposal to those of Cboe, which
the Exchange believes will ensure fair
competition among exchanges and
provide consistency and uniformity
among members of both Cboe and MIAX
Options by subjecting members of both
exchanges to the same position and
exercise limits for these multiply-listed
options classes. The Commission
believes that waiving the 30-day
operative delay is consistent with the
protection of investors and the public
interest. Therefore, the Commission
hereby waives the operative delay and
designates the proposal as operative
upon filing.44
40 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
42 17 CFR 240.19b–4(f)(6).
43 17 CFR 240.19b–4(f)(6)(iii).
44 For purposes only of waiving the 30-day
operative delay, the Commission has also
41 17
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At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
to determine whether the proposed rule
should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
MIAX–2018–10 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–MIAX–2018–10. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
considered the proposed rule’s impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
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Federal Register / Vol. 83, No. 60 / Wednesday, March 28, 2018 / Notices
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–MIAX–2018–10, and
should be submitted on or before April
18, 2018.45
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–06139 Filed 3–27–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82934; File No. SR–CBOE–
2018–023]
Self-Regulatory Organizations; Cboe
Exchange Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Relating to the Frequent
Trader Program
March 22, 2018.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that, on March
19, 2018, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
daltland on DSKBBV9HB2PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to provide an
additional mechanism for executing
brokers to submit Frequent Trader IDs
post-trade.
The text of the proposed rule change
is available on the Exchange’s website
(https://www.cboe.com/AboutCBOE/
CBOELegalRegulatoryHome.aspx), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
45 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend its
Fees Schedule. Specifically, the
Exchange proposes to provide an
additional mechanism for executing
brokers to submit Frequent Trader IDs
(‘‘FTIDs’’) post-trade. By way of
background, to participate in the
Frequent Trader Program, Customers
(includes Professional Customers and
Voluntary Professionals) may register
with the Exchange. Once registered, the
Customer is provided a unique
identification number (‘‘FTID’’) that can
be affixed to each of its orders. The
FTID allows the Exchange to identify
and aggregate all electronic and manual
trades during both the Regular Trading
Hours and Extended Trading Hours
sessions from that Customer for
purposes of determining whether the
Customer meets any of the various
volume thresholds. The Customer has to
provide its FTID to the Trading Permit
Holder (‘‘TPH’’) submitting that
Customer’s order to the Exchange
(‘‘executing agent’’ or ‘‘executing TPH’’)
and that executing TPH would have to
enter the Customer’s FTID on each of
that Customer’s orders. The Exchange
notes that there are instances however,
in which a Customer’s FTID was not, or
could not be, affixed to an order. As
such, the Exchange provides executing
TPHs the ability to submit to the
exchange a form (the ‘‘Frequent Trader
Program—Volume Corrections Form’’ or
‘‘Form’’) as a mechanism for executing
TPHs to identify transactions to the
Exchange that should have been, but
were not, associated with particular
FTIDs. The Form needs to be submitted
to the Exchange within 3 business days.
Transactions identified on the Form
only count towards the identified
Customer’s volume if that Customer was
already registered for the Frequent
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13329
Trader Program prior to the time the
transaction occurred (e.g., if a customer
trades 1,000 contracts the morning of
April 1 and registers for the Frequent
Trader Program the afternoon of April 1,
that customer cannot have its executing
TPH submit a form on its behalf for
those 1,000 contracts executed prior to
registration in the Program).
Effective March 19, 2018, a new FTID
field will be available on Cboe Trade
Match (‘‘CTM’’) terminals. This
enhancement will allow executing TPHs
to add or modify FTID information on
post-trade records on the trade date.
TPHs that require FTID modifications
on trade records which occurred on past
business days, limited to within the last
3 business days, must continue to
submit these changes using the Form
described above. The Exchange notes
that the FTID field may be changed by
the TPH via the CTM terminal without
notice to the Exchange. The Exchange
believes the enhanced functionality will
provide an additional means to input
FTID information and provide a more
efficient and streamlined way to add or
modify FTID information post-trade on
the trade date.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.3 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 4 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
The Exchange believes adding system
functionality to enable executing TPHs
to input FTIDs post-trade on the trade
date through CTM, instead of using a
manual Form, provides TPHs with a
more efficient mechanism to ensure a
Customer’s FTID that was not, or could
not be, affixed to an order, is attributed
to that Customer’s order and gets timely
reported, thereby removing
impediments to and perfecting the
3 15
4 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
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]]>Agencies
[Federal Register Volume 83, Number 60 (Wednesday, March 28, 2018)]
[Notices]
[Pages 13323-13329]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06139]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82931; File No. SR-MIAX-2018-10]
Self-Regulatory Organizations; Miami International Securities
Exchange, LLC; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change To Amend Exchange Rule 307, Position Limits, and
Exchange Rule 309, Exercise Limits
March 22, 2018.
Pursuant to the provisions of Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on March 8, 2018, Miami International Securities
Exchange, LLC (``MIAX Options'' or the ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') a proposed rule
change as described in Items I and II below, which Items have been
prepared by the Exchange. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
The Exchange is filing a proposal to amend Exchange Rules 307,
Position Limits, Interpretations and Policies .01, and 309, Exercise
Limits, Interpretations and Policies .01, to increase the position and
exercise limits for options on the following exchange traded funds
(``ETFs''): iShares China Large-Cap ETF (``FXI''), iShares MSCI
Emerging Markets ETF (``EEM''), iShares Russell 2000 ETF (``IWM''),
iShares MSCI EAFE ETF (``EFA''), iShares MSCI Brazil Capped ETF
(``EWZ''), iShares 20+ Year Treasury Bond Fund ETF (``TLT''),
PowerShares QQQ Trust (``QQQ''), and iShares MSCI Japan ETF (``EWJ'').
The text of the proposed rule change is available on the Exchange's
website at https://www.miaxoptions.com/rule-filings/ at MIAX Options'
principal office, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to amend Exchange Rules
307, Position Limits, Interpretations and Policies .01, and 309,
Exercise Limits, Interpretations and Policies .01, to increase position
and exercise limits, respectively, for options on the following ETFs:
FXI, EEM, IWM, EFA, EWZ, TLT, QQQ, EWJ.
Market participants' trading activity has been adversely impacted
by the current position limits as such limits have caused options
trading in the symbols subject to this proposal to move from exchanges
to the over-the-counter market. The Exchange submits this proposal with
the understanding that market participants' on-exchange activity has
been hindered by the existing position limits, causing them to be
unable to provide additional liquidity not just on the Exchange, but
also on other options exchanges on which they participate.\3\ The
Exchange understands that certain market participants wishing to make
trades involving a large number of options contracts in the symbols
subject to this proposal are opting to execute those trades in the
over-the-counter market. The over-the-counter transactions occur via
bi-lateral agreements, the terms of which are not publicly disclosed to
other market participants. Therefore, these large trades do not
contribute to the price discovery process performed on a lit market.
---------------------------------------------------------------------------
\3\ Cboe has received approval from the Commission for its
proposed rule change to increase its position limits for the
following ETFs: FXI, EEM, IWM, EFA, EWZ, TLT, QQQ, EWJ. See
Securities Exchange Act Release No. 82770 (February 23, 2018) (Order
Granting Accelerated Approval of a Proposed Rule Change, as Modified
by Amendment Nos. 1 and 2) (SR-CBOE-2017-057).
---------------------------------------------------------------------------
Position limits are designed to address potential manipulative
schemes and adverse market impact surrounding the use of options, such
as disrupting the market in the security underlying the options. The
potential manipulative schemes and adverse market impact are balanced
against the potential of setting the limits so low as to discourage
participation in the options market. The level of those position limits
must be balanced between curtailing potential manipulation and the cost
of preventing potential hedging activity that could be used for
legitimate economic purposes. Position limits for options on ETFs, such
as those subject to this proposal are determined pursuant to Exchange
Rule 307, and vary according to the number of outstanding shares and
the trading volume of the underlying stocks or ETFs over the past six-
months. The Exchange notes that the ETFs that underlie options subject
to this proposal are highly liquid, and are based on a broad set of
highly liquid securities and other reference assets. Likewise, the
Commission has recognized the liquidity of the securities comprising
the underlying interest of the SPDR S&P 500 ETF (``SPY'') in permitting
no position limits on SPY options since 2012,\4\ and expanded position
limits for options on EEM, IWM and QQQ.
---------------------------------------------------------------------------
\4\ See Securities Exchange Act Release Nos. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29); 67937
(September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-
091).
---------------------------------------------------------------------------
The largest in capitalization and the most frequently traded stocks
and ETFs have an option position limit of 250,000 contracts (with
adjustments for splits, re-capitalizations, etc.) on the same side of
the market; and smaller capitalization stocks and ETFs have position
limits of 200,000, 75,000, 50,000 or 25,000 contracts (with adjustments
for splits, re-capitalizations, etc.) on the same side of the market.
Options on FXI, EFA, EWZ, TLT, and EWJ are currently subject to the
standard position limit of 250,000 contracts, as set forth in Exchange
Rule 307. Interpretation and Policy .01 of Exchange Rule 307 sets forth
separate position limits for options on specific ETFs as follows:
Options on EEM are 500,000 contracts;
[[Page 13324]]
Options on IWM are 500,000 contracts; and
Options on QQQ are 900,000 contracts.
Interpretation and Policy .01 of Exchange Rule 307 also sets forth
separate position limits for options on SPY (no limit) and options on
DIA (300,000 contracts). However, the Exchange is not proposing to
modify the position limits for options on SPY or DIA.
The purpose of this proposal is to amend Rules 307, Position
Limits, Interpretations and Policies .01, and 309, Exercise Limits,
Interpretations and Policies .01 to double the position and exercise
limits for FXI, EEM, IWM, EFA, EWZ, TLT, QQQ, and EWJ. As such, options
on FXI, EFA, EWZ, TLT, and EWJ would no longer be subject to the
standard position and exercise limits as set forth under Exchange Rules
307 and 309. Accordingly, Interpretations and Policies .01 to Exchange
Rule 307 and Interpretations and Policies .01 to Exchange Rule 309
would be amended to set forth that the position and exercise limits for
options on FXI, EFA, EWZ, TLT, and EWJ would be 500,000 contracts.
These position and exercise limits equal the current position and
exercise limits for options on IWM and EEM and are similar to the
current position and exercise limits for options on QQQ, as set forth
in Interpretations and Policies .01 to Exchange Rule 307 and
Interpretations and Policies .01 to Exchange Rule 309.
Interpretations and Policies .01 to Exchange Rule 307 and
Interpretations and Policies .01 to Exchange Rule 309 would be further
amended to increase the position and exercise limits for the remaining
options subject to this proposal as follows:
The position and exercise limits for options on EEM would
be increased from 500,000 contracts to 1,000,000 contracts;
The position and exercise limits for options on IWM would
be increased from 500,000 contracts to 1,000,000 contracts; and
The position and exercise limits for options on QQQ would
be increased from 900,000 contracts to 1,800,000 contracts.
The Exchange's proposal mirrors that of the Cboe Exchange, Inc.
(``Cboe''), which seeks to increase the position and exercise limits
for FXI, EEM, IWM, EFA, EWZ, TLT, QQQ, and EWJ which was filed by Cboe
on August, 15, 2017.\5\
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\5\ See Securities Exchange Act Release No. 81483 (August 25,
2017), 82 FR 41457 (August 31, 2017) (SR-CBOE-2017-057 Notice of
Filing of a Proposed Rule Change To Amend Interpretation and Policy
.07 of Exchange Rule 4.11, Position Limits, To Increase the Position
Limits for Options on Certain ETFs). See also SR-CBOE-2017-057,
Partial Amendment No. 1 (November 22, 2017).
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In support of this proposal, the Exchange represents that the
above-listed ETFs qualify for either: (i) The initial listing criteria
set forth in Exchange Rule 402(i)(E)(2) for ETFs holding non-U.S.
component securities; or (ii) for ETFs listed pursuant to generic
listing standards for series of portfolio depository receipts and index
fund shares based on international or global indexes under which a
comprehensive surveillance agreement (``CSA'') is not required.\6\
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\6\ The Exchange notes that the initial listing criteria for
options on ETFs that hold non-U.S. component securities are more
stringent than the maintenance listing criteria for those same ETF
options. See Exchange Rule 402(i)(E)(2); Exchange Rule 403(g).
---------------------------------------------------------------------------
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks.\7\ EEM tracks the
performance of the MSCI Emerging Markets Index, which is composed of
approximately 800 component securities.\8\ The MSCI Emerging Markets
Index consists of the following 21 emerging market country indices:
Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India,
Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland,
Russia, South Africa, Taiwan, Thailand, and Turkey.\9\ IWM tracks the
performance of the Russell 2000 Index, which is composed of 2,000
small-cap domestic stocks.\10\ EFA tracks the performance of MSCI EAFE
Index, which has over 900 component securities.\11\ The MSCI EAFE Index
is designed to represent the performance of large and mid-cap
securities across 21 developed markets, including countries in Europe,
Australasia and the Far East, excluding the U.S. and Canada.\12\ EWZ
tracks the performance of the MSCI Brazil 25/50 Index, which is
composed of shares of large and mid-size companies in Brazil.\13\ TLT
tracks the performance of ICE U.S. Treasury 20+ Year Bond Index, which
is composed of long-term U.S. Treasury bonds.\14\ QQQ tracks the
performance of the Nasdaq-100 Index, which is composed of 100 of the
largest domestic and international nonfinancial companies listed on the
Nasdaq Stock Market LLC (``Nasdaq'').\15\ EWJ tracks the MSCI Japan
Index, which tracks the performance of large and mid-sized companies in
Japan.\16\
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\7\ See https://www.ishares.com/us/products/239536/ishares-china-largecap-etf.
\8\ See https://us.ishares.com/productinfo/fund/overview/EEM.htm.
\9\ See https://www.msci.com/products/indices/tools/#EM.
\10\ See https://www.ishares.com/us/products/239710/ishares-russell-2000-etf.
\11\ See https://www.ishares.com/us/products/239623/.
\12\ See https://www.msci.com/eafe.
\13\ See https://www.ishares.com/us/products/239612/ishares-msci-brazil-capped-etf.
\14\ See https://www.ishares.com/us/products/239454/.
\15\ See https://indexes.nasdaqomx.com/Index/Overview/NDX .
\16\ See https://www.ishares.com/us/products/239665/EWJ.
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MIAX Options represents that more than 50% of the weight of the
securities held by the options subject to this proposal are also
subject to a CSA.\17\ Additionally, the component securities of the
MSCI Emerging Markets Index on which EEM is based for which the primary
market is in any one country that is not subject to a CSA do not
represent 20% or more of the weight of the MSCI Emerging Markets
Index.\18\ Finally, the component securities of the MSCI Emerging
Markets Index on which EEM is based, for which the primary market is in
any two countries that are not subject to CSAs do not represent 33% of
more of the weight of the MSCI Emerging Markets Index.\19\
---------------------------------------------------------------------------
\17\ See Exchange Rule 402(i)(E)(2)(ii).
\18\ See Exchange Rule 402(i)(E)(2)(ii)(B).
\19\ See Exchange Rule 402(i)(E)(2)(ii)(C).
---------------------------------------------------------------------------
In support of this proposal, the following trading statistics have
been compiled.
----------------------------------------------------------------------------------------------------------------
Shares
ETF 2017 ADV 2017 ADV outstanding Fund market
(million) cap ($million)
----------------------------------------------------------------------------------------------------------------
FXI............................................. 15.08 71,944 78.6 3,343.6
EEM............................................. 52.12 287,357 797.4 34,926.1
IWM............................................. 27.46 490,070 253.1 35,809.1
EFA............................................. 19.42 98,844 1,178.4 78,870.3
EWZ............................................. 17.08 95,152 159.4 6,023.4
TLT............................................. 8.53 80,476 60.0 7,442.4
[[Page 13325]]
QQQ............................................. 26.25 579,404 351.6 50,359.7
EWJ............................................. 6.06 4,715 303.6 16,625.1
----------------------------------------------------------------------------------------------------------------
The Exchange believes that the liquidity in the underlying ETFs,
and the liquidity in the ETF options support its request to increase
the position limits for the options subject to this proposal. As to the
underlying ETF shares, through July 31, 2017, the year-to-date average
daily trading volume was: (i) FXI across all exchanges was 15.08
million shares; (ii) EEM across all exchanges was 52.12 million shares;
(iii) IWM across all exchanges was 27.46 million shares; (iv) EFA
across all exchanges was 19.42 million shares; (v) EWZ across all
exchanges was 17.08 million shares; (vi) TLT across all exchanges was
8.53 million shares; (vii) QQQ across all exchanges was 26.25 million
shares; and (vii) EWJ across all exchanges was 6.06 million shares.
In proposing the increased position limits, the Exchange considered
the availability of economically equivalent products and their
respective position limits. For instance, some of the ETFs underlying
options subject to this proposal are based on broad-based indices that
underlie cash settled options that are economically equivalent to the
ETF options that are the subject of this proposal and have no position
limits. Other ETFs are based on broad-based indexes that underlie cash-
settled options with position limits reflecting notional values that
are larger than the current position limits for ETF analogues (EEM,
EFA). Where there was no approved index analogue, the Exchange
believes, based on the liquidity, breadth and depth of the underlying
market, that the index referenced by the ETF would be considered a
broad-based index.\20\ The Exchange argues that if certain position
limits are appropriate for the options overlying the same index or is
an analogue to the basket of securities that the ETF tracks, then those
same economically equivalent position limits should be appropriate for
the option overlying the ETF. In addition, the market capitalization of
the underlying index or reference is large enough to absorb any price
movements that may be caused by an oversized trade. Also, the
Authorized Participant or issuer may look to the stocks comprising the
analogous underlying index or reference asset when seeking to create
additional ETF shares which are part of the creation/redemption process
to address supply and demand or to mitigate the price movement of the
price of the ETF.
---------------------------------------------------------------------------
\20\ Exchange Rule 1804 sets forth the position limits for
broad-based index options.
---------------------------------------------------------------------------
For example, the PowerShares QQQ Trust or QQQ is an ETF that tracks
the Nasdaq 100 Index or NDX, which is an index composed of 100 of the
largest non-financial securities listed on the Nasdaq Stock Market LLC
(``Nasdaq''). Options on NDX are currently subject to no position
limits but share similar trading characteristics as QQQ.\21\ Based on
QQQ's share price of $154.54 \22\ and NDX's index level of 6,339.14,
approximately 40 contracts of QQQ equals one contract of NDX. Assume
that NDX was subject to the standard position limit of 25,000 contracts
for broad-based index options under Exchange Rule 1804(a). Based on the
above comparison of notional values, this would result in a position
limit equivalent to 1,000,000 contracts for QQQ as NDX's analogue.
However, NDX is not subject to position limits and has an average daily
trading volume of 15,300 contracts. QQQ is currently subject to a
position limit of 900,000 contracts but has a much higher average daily
trading volume of 579,404 contracts. Furthermore, NDX currently has a
market capitalization of $17.2 trillion and QQQ has a market
capitalization of $50,359.7 million, and the component securities of
NDX, in aggregate, have traded an average of 440 million shares per day
in 2017, both large enough to absorb any price movement caused by a
large trade in the QQQ. The Commission has also approved no position
limit for NDX, although it has a much lower daily trading volume than
its analogue, the QQQ. Therefore, the Exchange believes it is
reasonable to increase the position limit for options on the QQQ from
900,000 to 1,800,000 contracts.
---------------------------------------------------------------------------
\21\ Id.
\22\ All share prices used herein are based on the closing price
of the security on November 16, 2017. Source: Yahoo Finance.
---------------------------------------------------------------------------
The iShare [sic] Russell 2000 ETF or IWM, is an ETF that also
tracks the Russell 2000 index or RUT, which is an index composed of
2,000 small-cap domestic companies in the Russell 3000 index. Options
on RUT are currently subject to no position limits but share similar
trading characteristics as IWM.\23\ Based on IWM's share price of
$144.77 and RUT's index level of 1,486.88, approximately 10 contracts
of IWM equals one contract of RUT. Assume that RUT was subject to the
standard position limit of 25,000 contracts for broad-based index
options under Exchange Rule 1804(a). Based on the above comparison of
notional values, this would result in a position limit equivalent to
250,000 contracts for IWM as RUT's analogue. However, RUT is not
subject to position limits and has an average daily trading volume of
66,200 contracts. IWM is currently subject to a position limit of
500,000 contracts but has a much higher average daily trading volume of
490,070 contracts. The Commission has approved no position limit for
RUT, although it has a much lower average daily trading volume than its
analogue, the IWM. Furthermore, RUT currently has a market
capitalization of $2.4 trillion and IWM has a market capitalization of
$35,809.1 million, and the component securities of RUT, in aggregate,
have traded an average of 270 million shares per day in 2017, both
large enough to absorb any price movement caused by a large trade in
the IWM. Therefore, the Exchange believes it is reasonable to increase
the position limit for options on the IWM from 500,000 to 1,000,000
contracts.
---------------------------------------------------------------------------
\23\ See supra note 20.
---------------------------------------------------------------------------
EEM tracks the performance of the MSCI Emerging Markets Index or
MXEF, which is composed of approximately 800 component securities
following 21 emerging market country indices: Brazil, Chile, China,
Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea,
Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South
Africa, Taiwan, Thailand, and Turkey. Below makes the same notional
value comparisons as made above. Based on EEM's share price of $47.06
and MXEF's index level of 1,136.45, approximately 24 contracts of EEM
equals one contract of MXEF. Assume that MXEF was subject to the
standard position limit of 25,000 contracts for broad-based index
options under Exchange Rule 1804(a). Based on the above comparison of
notional values, this would result in a position limit economically
equivalent to 604,000 contracts for EEM as MXEF's
[[Page 13326]]
analogue. However, MXEF has an average daily trading volume of 180
contracts. EEM is currently subject to a position limit of 500,000
contracts but has a much higher average daily trading volume of 287,357
contracts. Furthermore, MXEF currently has a market capitalization of
$5.18 trillion and EEM has a market capitalization of $34,926.1
million, and the component securities of MXEF, in aggregate, have
traded an average of 33.6 billion shares per day in 2017, both large
enough to absorb any price movement caused by a large trade in the EEM.
Therefore, based on the comparison of average daily trading volume, the
Exchange believes it is reasonable to increase the position limit for
options on the EEM from 500,000 to 1,000,000 contracts.
EFA tracks the performance of the MSCI EAFE Index or MXEA, which
has over 900 component securities designed to represent the performance
of large and mid-cap securities across 21 developed markets, including
countries in Europe, Australia and the Far East, excluding the U.S. and
Canada. Below makes the same notional value comparison as made above.
Based on EFA's share price of $69.16 and MXEA's index level of
1,986.15, approximately 29 contracts of EFA equals one contract of
MXEA. Assume MXEA was subject to the standard position limit of 25,000
contracts for broad-based index options under Exchange Rule 1804(a).
Based on the above comparison of notional values, this would result in
a position limit economically equivalent to 721,000 contracts for EFA
as MXEA's analogue. Furthermore, MXEA currently has a market
capitalization of $18.7 trillion and EFA has a market capitalization of
$78,870.3 million, and the component securities of MXEA, in aggregate,
have traded an average of 4.6 billion shares per day in 2017, both
large enough to absorb any price movement cause by a large trade in
EFA. However, MXEA has an average daily trading volume of 270
contracts. EFA is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 98,844
contracts. Based on the above comparisons, the Exchange believes it is
reasonable to increase the position limit for options on the EFA from
250,000 to 500,000 contracts.
FXI tracks the performance of the FTSE China 50 Index, which is
composed of the 50 largest Chinese stocks. There is currently no index
analogue for FXI approved for options trading. However, the FTSE China
50 Index currently has a market capitalization of $1.7 trillion and FXI
has a market capitalization of $2,623.18 million, both large enough to
absorb any price movement caused by a large trade in FXI. The
components of the FTSE China 50 Index, in aggregate, have an average
daily trading volume of 2.3 billion shares. FXI is currently subject to
a position limit of 250,000 contracts but has a much higher average
daily trading volume of 15.08 million shares. Based on the above
comparisons, the Exchange believes it is reasonable to increase the
position limit for options on the FXI from 250,000 to 500,000
contracts.
EWZ tracks the performance of the MSCI Brazil 25/50 Index, which is
composed of shares of large and mid-size companies in Brazil. There is
currently no index analogue for EWZ approved for options trading.
However, the MSCI Brazil 25/50 Index currently has a market
capitalization of $700 billion and EWZ has a market capitalization of
$6,023.4 million, both large enough to absorb any price movement caused
by a large trade in EWZ. The components of the MSCI Brazil 25/50 Index,
in aggregate, have an average daily trading volume of 285 million
shares. EWZ is currently subject to a position limit of 250,000
contracts but has a much higher average daily trading volume of 17.08
million shares. Based on the above comparisons, the Exchange believes
it is reasonable to increase the position limit for options on the EWZ
from 250,000 to 500,000 contracts.
TLT tracks the performance of ICE U.S. Treasury 20+ Year Bond
Index, which is composed of long-term U.S. Treasury bonds. There is
currently no index analogue for TLT approved for options trading.
However, the U.S. Treasury market is one of the largest and most liquid
markets in the world, with over $14 trillion outstanding and turnover
of approximately $500 billion per day. TLT currently has a market
capitalization of $7,442.4 million, both large enough to absorb any
price movement caused by a large trade in TLT. Therefore, the potential
for manipulation will not increase solely due to the increase in
position limits as set forth in this proposal. Based on the above
comparisons, the Exchange believes it is reasonable to increase the
position limit for options on TLT from 250,000 to 500,000 contracts.
EWJ tracks the MSCI Japan Index, which tracks the performance of
large and mid-sized companies in Japan. There is currently no index
analogue for EWJ approved for options trading. However, the MSCI Japan
Index has a market capitalization of $3.5 trillion and EWJ has a market
capitalization of $16,625.1 million, and the component securities of
the MSCI Japan Index, in aggregate, have traded an average of 1.1
billion shares per day in 2017, both large enough to absorb any price
movement caused by a large trade in EWJ. EWJ is currently subject to a
position limit of 250,000 contracts and has an average daily trading
volume of 6.6 million shares. Based on the above comparisons, the
Exchange believes it is reasonable to increase the position limit for
options on EWJ from 250,000 to 500,000.
The Exchange believes that increasing the position limits for the
options subject to this proposal would lead to a more liquid and
competitive market environment for these options, which will benefit
customers interested in these products. Under the proposal, the
reporting requirement for the above options would be unchanged. Thus,
the Exchange would still require that each Member that maintains a
position in the options on the same side of the market, for its own
account or for the account of a customer, to report certain information
to the Exchange. This information would include, but would not be
limited to, the options' position, whether such position is hedged and,
if so, a description of the hedge, and the collateral used to carry the
position, if applicable. Exchange Market Makers \24\ (including Primary
Lead Market-Makers) \25\ would continue to be exempt from this
reporting requirement, as Market Maker information can be accessed
through the Exchange's market surveillance systems. In addition, the
general reporting requirement for customer accounts that maintain an
aggregate position of 200 or more options contracts would remain at
this level for the options subject to this proposal.\26\
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\24\ The term ``Market Makers'' refers to ``Lead Market
Makers'', ``Primary Lead Market Makers'' and ``Registered Market
Makers'' collectively. See Exchange Rule 100.
\25\ The term ``Primary Lead Market Maker'' means a Lead Market
Maker appointed by the Exchange to act as the Primary Lead Market
Maker for the purposes of making markets in securities traded on the
Exchange. See Exchange Rule 100.
\26\ See Exchange Rule 310 for reporting requirements.
---------------------------------------------------------------------------
The Exchange believes that the existing surveillance procedures and
reporting requirements at the Exchange, other options exchanges, and at
the several clearing firms are capable of properly identifying unusual
and/or illegal trading activity. In addition, routine oversight
inspections of the Exchange's regulatory programs by the Commission
have not uncovered any material inconsistencies or shortcomings in the
manner in which the Exchange's market surveillance is conducted. These
procedures utilize
[[Page 13327]]
daily monitoring of market movements via automated surveillance
techniques to identify unusual activity in both options and underlying
stocks.\27\ Furthermore, large stock holdings must be disclosed to the
Commission by way of Schedules 13D or 13G.\28\ The positions for
options subject to this proposal are part of any reportable positions
and, thus, cannot be legally hidden. Moreover, the Exchange's
requirement that Members file reports with the Exchange for any
customer who held aggregate large long or short positions of any single
class for the previous day will continue to serve as an important part
of the Exchange's surveillance efforts.
---------------------------------------------------------------------------
\27\ These procedures have been effective for the surveillance
of trading the options subject to this proposal and will continue to
be employed.
\28\ 17 CFR 240.13d-1.
---------------------------------------------------------------------------
The Exchange believes that the current financial requirements
imposed by the Exchange and by the Commission adequately address
concerns that a Member or its customer may try to maintain an
inordinately large un-hedged position in the options subject to this
proposal. Current margin and risk-based haircut methodologies serve to
limit the size of positions maintained by any one account by increasing
the margin and/or capital that a Member must maintain for a large
position held by itself or by its customer.\29\ In addition, Rule 15c3-
1 \30\ imposes a capital charge on Members to the extent of any margin
deficiency resulting from the higher margin requirement.
---------------------------------------------------------------------------
\29\ See Exchange Rule 1502 for a description of margin
requirements.
\30\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its proposal is consistent with the
requirements of the Act and the rules and regulations thereunder that
are applicable to a national securities exchange, and, in particular,
with the requirements of Section 6(b) of the Act.\31\ Specifically, the
proposal is consistent with Section 6(b)(5) of the Act \32\ because it
is designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in facilitating
transactions in securities, to remove impediments to, and perfect the
mechanism of, a free and open market and a national market system and,
in general, to protect investors and the public interest. The current
position limits for the options subject to this proposal have inhibited
the ability of Market Makers to make markets on the Exchange.
Specifically, the proposal is designed to encourage Market Makers to
shift liquidity from over the counter markets onto the Exchange, which
will enhance the process of price discovery conducted on the Exchange
through increased order flow. The proposal will also benefit
institutional investors as well as retail traders, and public
customers, by providing them with a more effective trading and hedging
vehicle. In addition, the Exchange believes that the structure of the
options subject to this proposal and the considerable liquidity of the
market for those options diminishes the opportunity to manipulate this
product and disrupt the underlying market that a lower position limit
may protect against.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78f(b).
\32\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Increased position limits for select actively traded options, such
as that proposed herein, is not novel and has been previously approved
by the Commission. For example, the Commission has previously approved,
on a pilot basis, eliminating position limits for options on the SPDR
S&P 500 ETF (``SPY'').\33\ Additionally, the Commission has approved
similar proposed rule changes by other exchanges to increase position
and exercise limits for options on highly liquid, actively-traded
ETFs,\34\ including a proposal to permanently eliminate the position
and exercise limits for options overlaying the S&P 500 Index, S&P 100
Index, Dow Jones Industrial Average, and Nasdaq 100 Index.\35\ In
approving the permanent elimination of position and exercise limits,
the Commission relied heavily upon the exchange's surveillance
capabilities, the Commission expressed trust in the enhanced
surveillance and reporting safeguards that the exchange took in order
to detect and deter possible manipulative behavior which might arise
from eliminating position and exercise limits.\36\ Furthermore, as
described more fully above, options on other ETFs have the position
limits proposed herein, but their trading volumes are significantly
lower than the ETFs subject to the proposed rule change.
---------------------------------------------------------------------------
\33\ See Securities Exchange Act Release Nos. 67672 (August 15,
2012), 77 FR 50750 (August 22, 2012) (SR-NYSEAmex-2012-29); 67937
(September 27, 2012), 77 FR 60489 (October 3, 2012) (SR-CBOE-2012-
091).
\34\ See Securities Exchange Act Release Nos . 68086 (October
23, 2012), 77 FR 65600 (October 29, 2012) (SR-CBOE-2012-066);
Securities Exchange Act Release No. 68478 (December 19, 2012), 77 FR
76132 (December 26, 2012) (SR-BOX-2012-023); Securities Exchange Act
Release No. 68398 (December 11, 2012), 77 FR 74700 (December 17,
2012) (SR-ISE-2012-093); Securities Exchange Act Release No. 68293
(November 27, 2012), 77 FR 71644 (December 3, 2012) (SR-Phlx-2012-
132); Securities Exchange Act Release No. 68358 (December 5, 2012),
77 FR 73708 (December 11, 2012) (SR-NYSE MKT-2012-071); Securities
Exchange Act Release No. 68359 (December 5, 2012), 77 FR 73716
(December 11, 2012) (SR-NYSE Arca-2012-132); and .69457 (April 25,
2012), 78 FR 25502 (May 1, 2013) (SR-MIAX-2013-17).
\35\ See Securities Exchange Act Release Nos. 44994 (October 26,
2001), 66 FR 55722 (November 2, 2001) (SR-CBOE-2001-22); 52650
(October 21, 2005), 70 FR 62147 (October 28, 2005) (SR-CBOE-2005-41)
(``NDX Approval'').
\36\ See NDX Approval at 62149.
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Furthermore, the proposed position limits set forth in this
proposal would continue to address potential manipulative activity
while allowing for potential hedging activity for appropriate economic
purposes. The creation and redemption process for these ETFs also
lessens the potential for manipulative activity. When an ETF company
wants to create more ETF shares, it looks to an Authorized Participant,
which is a market maker or other large financial institution, to
acquire the securities the ETF is to hold. For instance, IWM is
designed to track the performance of the Russell 2000 Index, the
Authorized Participant will purchase all the Russell 2000 constituent
securities in the exact same weight as the index, then deliver those
shares to the ETF provider. In exchange, the ETF provider gives the
Authorized Participant a block of equally valued ETF shares, on a one-
for-one fair value basis. The price is based on the net asset value,
not the market value at which the ETF is trading. The creation of new
ETF units can be conducted all trading day and is not subject to
position limits. This process can also work in reverse where the ETF
company seeks to decrease the number of shares that are available to
trade. The creation and redemption process, therefore, creates a direct
link to the underlying components of the ETF, and serves to mitigate
potential price impact of the ETF shares that might otherwise result
from increased position limits.
The ETF creation and redemption seeks to keep ETF share prices
trading in line with the ETF's underlying net asset value. Because an
ETF trades like a stock, its price will fluctuate during the trading
day, due to simple supply and demand. If demand to buy an ETF is high,
for instance, the ETF's share price might rise above the value of its
underlying securities. When this happens, the Authorized Participant
believes the ETF may now be overpriced, and can buy the underlying
shares that compose the ETF and then sell the ETF shares on the open
market. This should help drive the ETF's share price back toward fair
value. Likewise,
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if the ETF starts trading at a discount to the securities it holds, the
Authorized Participant can buy shares of the ETF and redeem them for
the underlying securities. Buying undervalued ETF shares should drive
the price of the ETF back toward fair value. This arbitrage process
helps to keep an ETF's price in line with the value of its underlying
portfolio.
Lastly, the Commission expressed the belief that removing position
and exercise limits may bring additional depth and liquidity without
increasing concerns regarding intermarket manipulation or disruption of
the options or the underlying securities.\37\ The Exchange's existing
surveillance and reporting safeguards are designed to deter and detect
possible manipulative behavior which might arise from eliminating
position and exercise limits.
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\37\ Id.
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B. Self-Regulatory Organization's Statement on Burden on Competition
MIAX Options does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes the
entire proposal is consistent with Section (6)(b)(8) of the Act \38\ in
that it does not impose any burden on competition that is not necessary
or appropriate in furtherance of the purposes of the Act. On the
contrary, the Exchange believes the proposal promotes competition
because it will enable the listed option exchanges to attract
additional order flow from the over-the-counter market, who in turn
compete for those orders.\39\ The Exchange believes that the proposed
rule change will result in additional opportunities to achieve the
investment and trading objectives of market participants seeking
efficient trading and hedging vehicles, to the benefit of investors,
market participants, and the marketplace in general.
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\38\ 15 U.S.C. 78f(b)(8).
\39\ For example, Nasdaq position limits are determined by the
position limits established by the Exchange. See Nasdaq Rule Sec. 7
(Position Limits).
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In this regard and as indicated above, the Exchange notes that the
rule change is being proposed as a competitive response to changes put
in place at Cboe. MIAX Options believes this proposed rule change is
necessary to permit fair competition among the options exchanges and to
establish uniform position limits for additional multiply listed option
classes.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the proposed rule change does not (i) significantly affect
the protection of investors or the public interest; (ii) impose any
significant burden on competition; and (iii) become operative for 30
days from the date on which it was filed, or such shorter time as the
Commission may designate, it has become effective pursuant to Section
19(b)(3)(A) of the Act \40\ and Rule 19b-4(f)(6) thereunder.\41\
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\40\ 15 U.S.C. 78s(b)(3)(A).
\41\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written
notice of its intent to file the proposed rule change, along with a
brief description and the text of the proposed rule change, at least
five business days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the Commission.
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A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the
Act \42\ normally does not become operative for 30 days after the date
of its filing. However, Rule 19b-4(f)(6)(iii) \43\ permits the
Commission to designate a shorter time if such action is consistent
with the protection of investors and the public interest. The Exchange
has asked the Commission to waive the 30-day operative delay so that
the proposed rule change may become operative upon filing. The Exchange
states that waiver of the operative delay would be consistent with the
protection of investors and the public interest because it would allow
the Exchange to immediately increase its position and exercise limits
for the products subject to this proposal to those of Cboe, which the
Exchange believes will ensure fair competition among exchanges and
provide consistency and uniformity among members of both Cboe and MIAX
Options by subjecting members of both exchanges to the same position
and exercise limits for these multiply-listed options classes. The
Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
Therefore, the Commission hereby waives the operative delay and
designates the proposal as operative upon filing.\44\
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\42\ 17 CFR 240.19b-4(f)(6).
\43\ 17 CFR 240.19b-4(f)(6)(iii).
\44\ For purposes only of waiving the 30-day operative delay,
the Commission has also considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-MIAX-2018-10 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-MIAX-2018-10. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal
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office of the Exchange. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-MIAX-2018-10,
and should be submitted on or before April 18, 2018.\45\
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\45\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-06139 Filed 3-27-18; 8:45 am]
BILLING CODE 8011-01-P
